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No Charges for Apple Over Options

Federal securities regulators said yesterday that they would bring no civil charges against Apple over the backdating of executive stock options. But they stopped short of removing the cloud that for nearly a year has hung over the company’s chief executive, Steven P. Jobs.

Lawyers for the Securities and Exchange Commission filed a lawsuit that spelled out their case against two former Apple executives in connection with fraudulent dating of options. One defendant, Nancy R. Heinen, Apple’s general counsel until last May, will contest the accusations; the other, Fred D. Anderson, chief financial officer from 1996 to 2004, reached a settlement without admitting or denying wrongdoing.

In its 20-page complaint, the agency presents a detailed version of events surrounding two options grants in 2001 — one benefiting Mr. Jobs, the other his top managers — for which documents were created or altered to establish action by Apple’s board on dates when none occurred.

On a central point — whether Mr. Jobs understood the accounting implications of dating options grants — the complaint offers no evidence. But Mr. Anderson’s lawyer, in a statement yesterday, turned the focus back on the Apple chief by asserting that Mr. Anderson had “cautioned” Mr. Jobs about necessary procedures, including the need for board approval to be confirmed “in a legally satisfactory method.”

While the lawsuit portrays Mr. Jobs as having been involved in the retroactive choice of a date for one grant, it does not show that he had any knowledge of or involvement in the fabrication of documents. Instead, it paints a picture of Ms. Heinen acting on her own.

The S.E.C. would not say whether other individuals could still face action. But its move against the two former executives could signal that the Justice Department is winding down a parallel criminal investigation into Apple’s handling of options. In other similar cases, like those involving Brocade Communications Systems and Comverse Technology, the two agencies filed charges against top executives at the same time. A Justice Department spokeswoman declined to comment.

Unless the government can move beyond evidence of passive and indirect involvement, some legal experts say, a case against Mr. Jobs might be difficult to win.

“Steve Jobs dodged a bullet,” said Mark C. Zauderer, a trial lawyer in New York specializing in white-collar cases. “This is another circumstance where the government is going after an easier target. It will generally shy away from situations where the evidence is ambiguous or subject to different interpretations.”

Mr. Jobs’s lawyer referred requests for comment to Apple. The company simply expressed satisfaction that it would not face S.E.C. action and cited the agency’s praise of its “swift, extensive and extraordinary cooperation.”

Apple’s shares closed yesterday at $93.24, down 27 cents.

Ms. Heinen was accused of fraudulently backdating two separate stock options grants, providing recipients with attractive prices while allowing the company to avoid a $40 million charge against earnings. She also was accused of directing Apple’s legal staff to create phony documents to conceal the fraud.

Even though Apple said in December that a six-month inquiry had found “no misconduct” by its current management, it left crucial questions about a 2001 option grant made to Mr. Jobs unanswered, including who authorized, knew of and carried out a fabrication of board minutes to provide a foundation for the option grant date. Yesterday’s complaint helped fill some gaps but also left others.

Photo

Fred Anderson, right, has reached a settlement with federal officials for his role in the backdating of stock options involving Steven P. Jobs, left.Credit
Win McNamee/Reuters

According to the complaint, Apple’s board granted 7.5 million stock options to Mr. Jobs on Aug. 29, 2001, to replace an earlier grant that had no immediate exercise value because the share price had declined. But Mr. Jobs was dissatisfied with the vesting terms of the new grant, and for the next three months, negotiations continued. Meanwhile, Apple started a new fiscal year at the end of September but had not disclosed the August grant to KPMG, its auditors.

By the time Ms. Heinen recognized in mid-December that the “August 2001 grant date would no longer withstand scrutiny,” the complaint asserts, she recommended to Arthur D. Levinson, the chairman of Apple’s compensation committee, that it choose one of several dates in the new fiscal year that mimicked the Aug. 29 share price of $17.83.

On Dec. 18, 2001, a day the stock closed at $21.01, Mr. Jobs and the compensation committee came to an agreement: the date of the 7.5 million-option grant would be Oct. 19, 2001, with an exercise price of $18.30.

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To cover up the backdated grant, the complaint asserts, Ms. Heinen directed her staff in January 2002 to document “a phony special meeting” of Apple’s board at which all directors except Mr. Jobs had met to discuss his pay on Oct. 19, 2001. In fact, no meeting had occurred.

Ms. Heinen subsequently signed off on two other sets of previously approved board minutes, which she had altered in an effort to further conceal the backdating, the complaint says.

In a statement, Miles Ehrlich, the lawyer for Ms. Heinen, said his client had not backdated options or deceived anyone inside or outside the company. “Every action Nancy took was fully understood and authorized by Apple’s board,” he said.

The complaint also details an option grant in early 2001 that was made to six senior Apple executives, including Mr. Anderson and Ms. Heinen. While Apple finalized the terms of the 4.8 million option grant in February 2001, when its shares were trading at nearly $21, the complaint says, Ms. Heinen caused Apple to backdate the grant to Jan. 17, when Apple’s share price was $16.81.

In the complaint, the S.E.C. asserts that on Jan. 30, Ms. Heinen provided Mr. Jobs with a list of daily closing share prices earlier in the month, when Apple’s share price was lower. The particular dates were selected, an e-mail message sent by Ms. Heinen said, to “avoid any perception the board was acting inappropriately for insiders prior to Macworld,” a trade show in early January at which the announcement of the iPod caused the stock to rise.

Ms. Heinen, the S.E.C. contends, then had false paperwork prepared so Apple’s board could authorize the grant. On Feb. 1, the complaint says, Ms. Heinen asked directors to sign a “unanimous written consent” attesting that they had approved the grant as of Jan. 17.

It was in connection with this grant that Mr. Anderson’s lawyer, Jerome Roth, said yesterday that in late January his client had “cautioned Mr. Jobs that the executive team grant would have to be priced on the date of the actual board agreement or there could be an accounting charge.”

In his written statement, Mr. Roth went on to say that Mr. Anderson “was told by Mr. Jobs that the board had given its prior approval and that the board would verify it.”

He said Mr. Anderson “relied on these statements by Mr. Jobs and from them concluded that the grant was being properly handled.”

But the complaint asserts that Mr. Anderson was told by Ms. Heinen on Jan. 31 that prior dates were being considered, and responded, “Tuesday the 16th looks fine to me.”

A days later, the complaint said, Ms. Heinen told Mr. Anderson that Mr. Jobs “had agreed to use Apple’s closing price on Jan. 17 for the Executive Team grant.”In an interview, Mr. Roth said he saw nothing inconsistent between the S.E.C. complaint and his statement about Mr. Anderson’s role. And citing confidentiality, he declined to say whether Mr. Anderson had provided government investigators with his account of his advice to Mr. Jobs.

Mr. Anderson, a director from 2004 until last September, agreed to pay a $150,000 penalty and return about $3.5 million that reflects his gains from the backdating of the January 2001 grant. Ms. Heinen’s gain from the backdating of those options was $1.6 million, the complaint says.

A version of this article appears in print on , on Page C1 of the New York edition with the headline: No Charges for Apple in Options Dating. Order Reprints|Today's Paper|Subscribe